Mr. E. M. Bernstein, an economic consultant with the IMF, proposed that the member countries of the IMF may threat their quotas as part of their international reserves so that, they make greater use of the Fund resources in financing their deficits.
At present members borrow from the Fund to finance their balance of payments deficit only after they have drawn heavily on their own reserves. But, according to the Bernstein proposals, their deficit would be financed from their own reserves, and the rest by the Fund borrowing. According to Bernstein’s suggestion, the necessity of holding larger reserves on the part of member countries would be avoided.
Bernstein has divided the demand for international liquidity into two parts: (i) the transactions and the precautionary demand for international liquidity, and (ii) the speculative demand international liquidity.
For meeting the first type of demand, he proposed that member countries quotas with the Fund should be treated as part of their working reserves, such reserves being eligible to be viewed by the countries concerned as a normal means of meeting temporary balance of payments difficulties. But for the speculative demand for international money, Bernstein proposed that the Fund should enter into a standby arrangement with some of its members whose currencies may be occasionally in great demand.
The core of the arrangement is that the Fund will be able to borrow upto an agreed limit by the issue of debentures from any one or more of the six ECM countries, the U.S.A., U.K., Canada and Japan (10 countries in all), and utilise the sums thus, borrowed to support the currency or currencies of any one or more of these countries which may be under pressure from an unsettling outflow of speculative short-term capital.
Bernstein further maintained that, there should be procedural changes in the operation of the Fund to enable member countries to borrow in excess of their quotas. He suggested access to Fund resources to be much more automatic and the promise to repay, the only stipulation attached to a member country’s drawing.
It is easy to see that the Bernstein proposal implies that the existing level of international reserves and the increments resulting from gold production and growth in foreign exchange reserves will, be adequate to meet the reserve needs of the world with a few changes in the operations of the IMF.